I’ll admit that Under Armour Inc (NYSE:UAA,UA) has had a much better 2018 than I thought it would. Under Armour stock has gained 24% so far this year. UAA stock now has bounced some 56% since hitting a five-year low in early November.
Gains after Q4 earnings despite a mixed quarter have helped. A continuing, if somewhat choppy, rally in retail overall has provided a tailwind. And overall, investors seem more bullish on a possible turnaround at Under Armour.
The optimism of late, however, seems to set up a dangerous Q1 earnings report for UAA stock on Tuesday morning. Q1 results aside, Under Armour stock has a nasty history of post-earnings declines, particularly over the past few years.
Key retailers don’t look particularly strong. And Under Armour stock remains expensive by pretty much any measure.
Combine those risks with steady appreciation heading into the Q1 release, and there’s a real risk that UAA will see another post-earnings decline this week.
A Blowout Quarter for Under Armour Stock Is Unlikely
At least looking at Wall Street’s numbers, expectations for Under Armour’s Q1 aren’t particularly great. Consensus estimates project a loss of $0.06 per share, off $0.05 from Q1 2017, with revenue essentially flat year-over-year.
Under Armour’s own guidance suggests a stronger performance for the full year, with net revenue guided up low single digits and adjusted EPS flat to down.
But that guidance incorporated expectations for better results in the second half, which seems to suggest that the Street, at least, is expecting Under Armour’s turnaround efforts to bear immediate fruit.
That looks potentially too optimistic. Rivals Nike Inc (NYSE:NKE) and adidas AG/S ADR (OTCMKTS:ADDYY) have optimism of their own; both stocks actually have outpaced the gains in Under Armour stock so far this year.
Nike posted a strong fiscal Q3 report in March. And notably, its CEO called a bottom in North America, precisely where Under Armour has been struggling the most in recent quarters.
Some enthusiasm toward the sneaker space obviously has helped all three stocks. But this remains an intensely competitive market, and it’s unlikely that Under Armour can post a blowout quarter on the top line at the same time its rivals are succeeding.
Meanwhile, results from key Under Armour retailers don’t look particularly impressive. Both Foot Locker, Inc. (NYSE:FL) and Finish Line Inc (NASDAQ:FINL) posted disappointing same-store sales in their most recent quarters.
Full-year revenue guidance from Dicks Sporting Goods Inc (NYSE:DKS) and Kohl’s Corporation (NYSE:KSS) was below expectations. (Dick’s also is emphasizing private label sales in apparel.)
All told, there’s little reason to expect a blowout quarter, or even a beat, from Under Armour in terms of revenue.
Under Armour Stock Needs Higher Margins and Better Earnings
And that’s a problem for UAA stock heading into earnings. Cost-cutting efforts this year are baked into expectations. If revenue doesn’t beat, Under Armour needs to expand gross margins.
As I wrote back in January, that’s going to be exceedingly difficult for Under Armour to accomplish.
Without a beat, what propels Under Armour stock higher? The turnaround is going to take at least another quarter (most likely two); investors in a more volatile market very well could get impatient and/or take profits if Under Armour doesn’t show immediate progress.
UAA isn’t cheap, or close; it trades at 42x 2020 EPS estimates, as Deutsche Bank AG (USA) (NYSE:DB) analysts pointed out recently.
Admittedly, Under Armour stock has outpaced my expectations so far this year. But that could change quickly on Tuesday. At the beginning of April, I called UAA one of the 10 worst stocks to buy for Q2.
With rising expectations, a steep valuation, and basically zero growth, I still think that’s the case. And if it is, Tuesday could be a difficult day for Under Armour shareholders.
As of this writing, Vince Martin has no positions in any securities mentioned.
